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Bernanke Fights Ron Paul In Congress: Gold Isn't Money

Chairman Ben Bernanke faced-off with Fed-hating Representative Ron Paul during his monetary policy report to Congress on Wednesday. The head of the Fed was forced to respond to accusations of enriching already rich corporations while failing to help Main Street, while he was pushed on his views on gold. When asked whether gold is money, Bernanke flatly responded “No.” (See video below).

While most of Bernanke’s reports to Congress serve politicians to pursue their own agendas by gearing the Chairman towards their issues, with Republican Rep. Bacchus talking of the unsustainability of Medicaid and Rep. Frank (D, Mass.) asking about the need to raise the debt limit without cutting spending, it was a stand-off between Bernanke and Ron Paul that took all the attention. (Read Apocalyptic Bernanke: Raise The Debt Ceiling Or Else).

Rep. Ron Paul, Republican for Texas, asked Bernanke why a capital injection of more than $5 trillion “hasn’t done much” to help the consumer, who makes up about two-thirds of GDP in the U.S., and prop up the economy, while it helped boost corporate profits. “You could’ve given $17,000 to each citizen,” Ron Paul claimed.

Bernanke, clearly on the defensive, told Rep. Ron Paul that his institution hadn’t spent a single dollar, rather, the Fed has been a “profit center” according to the Chairman, returning profits to the federal government. As Bernanke began to sermon Rep. Paul on the history of the Fed (“we are here to provide liquidity [in abnormal situations],” the Chairman said), he was interrupted.

“When you wake up in the morning, do you think about the price of gold,” Rep. Paul asked. After pausing for a second, Bernanke responded, clearly uncomfortable. that he paid much attention to the price of gold, only to be interrupted once again.

“Gold’s at about $1,580 [an ounce] this morning, what do you think of the price of gold?” asked Rep. Paul. A stern-faced Bernanke responded people bought it for protection and was once again cut-off, with Ron Paul once again on the offensive.

After Paul interrupted him to note the long history of gold being used as money, Bernanke continued,”It’s an asset. Would you say Treasury bills are money? I don’t think they’re money either but they’re a financial asset.”

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The question of the “gold standard”, a popular one here at Forbes.com, is interesting as it is generally anachronistic, there is not a single government in the world which uses a gold standard and it has been decades since there has been one. Ironically, the US private sector, as opposed to the government, has a de facto gold standard as all US currency is completely convertible into gold through the free market (the US Treasury Department is one of the few financial organization that will not do this).

However ignoring all of this, I am quite unclear what a “gold standard” would even mean in the 21st century. The vast majority of financial transaction are not even conducted using paper “fiat” money, it is all electronic or bank drafts. The larger the transaction, the less likely it is to involve actual physical money. I would invite any reader to examine their own personal or professional financial transactions see how many involve the exchange of any physical form of legal tender.

In a world of electronic money, what would it mean to have a “gold standard”?

Well obviously it is not anachronistic, even though that is a popular thing to say by propogandizing babblemonsters.

What it would mean is that the FED couldn’t punch a bunch of ZERO’S into their computer, and then send the new invisible money over to Lehman Bros, Goldman Sachs, etc. (IE The folks who sponsor the campaigns of Romney, Obama, et.al)

Let me try to answer your question with a question. Why are federal reserve notes ‘money’? Is it because Ben and Barack pass a law telling us they’re money? Or is it because the trading public accepts them as a medium of exchange?

Gold is a form of money if people are willing to trade using it as a medium, and would become a common currency again if people preferred it to the dollar. And as gold is 5x more valuable than it was a decade ago (and central banks are buying it in massive quantities), it may be poised to become the basis for a currency again.

I think the question you are asking is whether it would be efficient – or wise – to have gold become a basis for a currency again in a modern world. And that’s a fair question – as there are benefits to a fiat currency if it is managed to retain its value. A strong fiat currency can be leveraged to restore liquidity in a crisis (see TARP), and it does enable governments to ‘borrow’ more easily in time of war or other crisis. Would this be crimped in an asset-backed currency setting? Probably – but is that bad?

A fiat currency is the source of much temptation to our modern democratic republics. Current politicians – unable or unwilling to tax current generations – pass their taxes on to future generations (for current spending) via a degraded currency (printing money and issuing debt). Hence my children will inherent ‘assets’ that are worth less (or even worthless) if we continue on the current path – we’re spending their future labor for current political gain. That’s just wrong – and is the road to purgatory.

Would a gold standard work? Of course we could make it work. We wouldn’t need to mint gold – but our currency would simply have to be tied to the value of real assets (gold, or anything we might choose) – and thus impose discipline on spending and taxes. Trillion dollar deficits and QEI/II/III would not be possible (the market wouldn’t allow it) – although TARP almost certainly would have if we did this right (and hence liquidity would be available in a crisis – a strong currency can be borrowed against).

It’s interesting to note that Greenspan/Volcker’s Fed intentionally tied the dollar policy to the value of a basket of assets during the hard money days in the 80′s, and we had a boom. Coincidence? I think not.

A new Gold Standard (I use that as a proxy for an asset-backed currency) would just formalize what they did via policy in the 80′s. It would end DC’s extreme power to impoverish the future, and force hard choices by government. Who isn’t for that?

And the private sector would likely flourish, as our money would be stabilized (I’d bet money would flow INTO the US again). We’d still have recessions – we did before the Fed and have since its creation – but we’d sleep knowing our savings would be worth keeping instead of spending.

I was a long-time skeptic of this idea – but this last decade of fed balance sheet expansion (printing $$) and the mortgage collapse have convinced me we need to take the power away from the Ivy League-ers at the Fed and DC.

I don’t think that by virtue of it being electronically traded it loses its “fiat money” status, as it still exists, and is backed, by “faith” in the Government and its ability to pay.

If bills were actually convertible (not just in the private market, but by the government as well), then it doesn’t matter if the transaction is electronic, it just matters that both parties actually have those bills and are willing to use them, and that they actually trade hands.

I think that commodity exchanges provide the closest modern system, in which the vast majority of all trades never conclude with an actual exchange of the underlying goods.

It could be anything that cannot be increased in quantity by more than one to three percent a year. Even will power and self discipline could be used as money…if it actually existed, which it does not.

I think it’s important that we use this as an opportunity to demystify the money system, and make it much more resistant to manipulation. The Fed operates in secret – and it’s getting harder to see why that’s to our collective benefit (unless you’re a government leader or run a large/connected bank/i-bank).

And this means we need to take away some of the Fed’s power – and at the same time protect it from speculation/manipulation. I think there’s a good case that smart speculators have manipulated silver, gold, and other commodities on occasion in recent years (they usually lose their shirts, but not always… yet it does happen – see George Soros and his peers, for example). And hence it’s also important that the accepting public believe the ‘new money’ relatively secure from such gamesmanship.

Hence I would argue for a commodity basket – one that is big enough and diverse enough that it is shielded from gross gamesmanship at the market level, and understandable enough that it fairly represents that value of what we actually need money to accomplish – i.e., to facilitate the orderly/predictable exchange of goods and services. In such a basket, some relative values would go up or down(due to demand/supply and shortage/surplus) – but in aggregate would be relatively stable. And that’s to the good.

One interesting question that the asset backed currency community needs to answer is whether such an approach would yield an appreciating currency (when the economy grows, and possibly the opposite when the opposite occurs) and whether that’s a good thing. That would certainly be at odds with the current academic argument for low inflation and the liquidity it offers. I would answer yes and yes, in most cases – but that’s a longer discussion.

No, rather the opposite. I think that electronic money is even more “faith-based” (for want of a more euphonious phrase) than paper money. At least with paper money, there is something that can be physically held and examined. Electronic money appears to be nothing more than pixels on a screen or at best, something that one’s printer might produce from a computer screen.

This raises some interesting questions.

1) Empirically, has anything changed since the shift from paper fiat money to electronic “super-fiat” money? The transition has occurred with hardly anyone even noticing it. If the “fiat-ness” of money was a significant practical issue, one would imagine that such a momentous shift would have produced a few, noticeable bumps. This suggests to me, that there is not the slightest practical implication of this transition.

2) In theory, behind each electronic transaction there exists somewhere some corresponding physical money that could have been used in the same transaction. However is this actually the case? Is there actual physical paper or coin money behind each and every electronic transaction. Does anyone know? Is it even possible to know? Is there an economy out there with more eDollars than physical dollars?

3) Returning to the issue at hand, what would a “gold standard” mean in a world electronic transactions? One the one hand, it of course already exists. Each and every eDollar can be converted into gold (or silver or platinum &c) whenever and wherever it is desirable and feasible. However, if for each electronic transaction there had to be some physical piece of gold somewhere that changed hands in parallel, how would that be done? How would anyone even know?

It is every bit as a “leap of faith” to imagine that there is a real piece of gold behind each corresponding pixel on a computer screen as in the use of paper money.